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Retirement Consistent Cash Flow


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As you move from asset accumulation (saving money for retirement) to income distribution (spending money in retirement), positioning your investments to provide a primary income that lasts as long as you need becomes more complex and difficult to manage.  

The most important part of financial readiness for retirement is having consistent cash flow.  With health care costs continuing to rise and lifespans growing longer, the fear of outliving one’s nest egg looms large.

A generation ago, new retirees were concerned about making sure they could leave a reasonable inheritance to their children. Now, they’re just hoping to have enough money to live out their own days comfortably.

Even if you have enough saved for retirement, you’ll need a smart strategy to make sure your funds last through a retirement that these days can be 30 years or more.

The financial realities of our world are changing. More and more people need to rely on their own investments for income during retirement. The assets from which you expect to create a vital stream of income during your retirement face risk from economic turmoil, interest rate uncertainty and market volatility.

Retirement planners have touted the “4 percent rule” for years. Under it, retirees can safely withdraw 4 percent of their total assets in their first year of retirement, and withdraw that amount, adjusted for inflation, thereafter.

The problem with that, as many new retirees learned in 2008, is that if the market crashes early on in your retirement, your assets could suffer irreparable damage.

The puzzle is this: A guaranteed lifetime income is a valuable thing (especially if it comes with regular cost-of-living adjustments), and people who receive one through a traditional state or corporate pension are generally very happy with it.

In times such as these when financial markets are volatile and other product interest rates are paltry, annuities may look particularly attractive. Think about starting to lock in those returns with an indexed annuity. A personal pension – Guaranteed by the insurance company, providing no worries about market volatility.

An individual retirement saver who doesn’t want to risk going broke at age 95 needs to put aside a lot more money than a pension plan or insurance company has to in order to guarantee somebody a lifetime income.  A no fee annuity can help create the steady and guaranteed income that can give retirees peace of mind.

So why is it that those with the self-directed “defined contribution” retirement plans that have become standard in the U.S. — 401(k)s, 403(b)s, IRAs, and the like — so rarely convert the money they’ve saved into pension-like life annuities that guarantee a monthly check until they die?

Part of the explanation is that only 6% of corporate 401(k) plans even offer an annuity option at retirement (you instead have to roll the money over into an IRA and then shop for an annuity).  How ridiculous it is that American retirees have to spend so much time thinking about their investments, and how much better off most people would be with lifetime annuities.

Today with  401(k)s, 403(b)s, IRAs, and the like – everyone will be trusted to use their pension fund as they decide is best for themselves.  I think most people who have been responsible enough to save for their retirement, will also want to manage their money responsibly during retirement too.

However, the most common investment mistakes that retirees make are the same mistakes that people make during their working years:

  • Buying mutual funds with high expense ratios.
  • Holding too much of their net worth in one or two individual stocks.
  • Using allocations that are a poor fit for their risk tolerance.

Many future retirees and present retirees have not taken in consideration the impact that “Uncle Sam” will have on the income from your 401(k), 403(b) or IRA accounts.  Uncle Sam owns up to 30-, 40-, or even nearly 50-percent of your account value. Many don’t realize the impact this will have on your actual retirement income.

Annuities are a type of investment many people make to create an income source in the future.  With recent income rider innovations and rising retiree’s fears about outliving their money, it’s safe to say that most indexed annuity purchases today are based on lifetime income.

With such annuities, you pay the insurance company a one-time premium, and the insurance company promises to pay you a certain amount of money (or a certain amount of inflation-adjusted money) every month for the rest of your life.

In other words, they’re just pensions purchased from an insurance company. No bells, whistles or complicated moving parts.  But for people whose need for a very safe source of lifetime income overwhelms most other considerations, it is a mistake to fail to at least consider a lifetime annuity for a portion of the portfolio.

The big advantage for the individual is that you don’t run out of money before you die, which lots of Baby Boomers are currently on track to do.

People usually have a good idea when they retire at 65 what’s going to happen for next 10 or 15 years. But they have no idea if you go further out.” A deferred annuity amounts to relatively cheap insurance against what might happen “further out.

Additionally, the government recently introduced the concept of longevity annuities within the 401(k) plans.  This kind of annuity can be a deferred one that you buy at age 65 but doesn’t start providing income until age 80.

You can’t predict your life span, your total retirement spending or your future investment returns.  But you can predict with relative certainty your basic retirement expenses, such as utilities, food and clothing, as well as the amount of income you’ll receive from guaranteed sources, such as Social Security, pensions and annuities.

Match your essential retirement expenses with your guaranteed income sources, and you’ve gone a long way toward building a more secure draw-down strategy—without relying on any rules of thumb. A secure financial future is about more than just reaching a destination.

 

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Sunday, October 19th, 2014 Wealth Management No Comments

Guidance Guarantees For Retirees

Planning for retirement is the most difficult part of managing your money—and it’s getting tougher.  There are numerous surveys about retirees and future retirees about their retirement preparations and biggest concerns. They discovered an overwhelming number of them are inadequately prepared and live with retirement income uncertainties.

In the 2008 economic downturn the 401(k) drop was tremendous as trillions of dollars evaporated from those accounts that have become the prime source of retirement funds for a majority of American workers, affecting their psyche and their future.  Is history repeating?  This week the stock market had a huge and ugly loss of wealth, and it might be expected to weigh heavily on the economy and 401(k) participants.

Make sure you can retire and not come back. Those who retire then return to work usually do so because they have to, not because they are bored at home.  Few of us know exactly when we will retire and none of us know when we will die. But retirement planning is built around choosing some kind of reasonable estimate for those two variables.

Planning for retirement is now the focus of the largest and most influential generation in U.S. history. With one American turning 60 every seven seconds that’s more than 12,500 people every day according to the U.S. Census the Baby Boomer generation in overwhelming numbers entering their retirement years.

The fact is, many Americans are living longer and are at greater risk of running out of money in retirement.  In the days of traditional pensions, many Americans could rely on professional money managers to grapple with these problems. Left on their own, without a reliable source of lifetime income (other than Social Security), workers don’t know where to start.

The 401(k) plan was never meant to be a mainstream pension plan and is a poor substitute for one. It’s a voluntary program that was intended to supplement retirement savings –  one of those quirky little options in the byzantine tax code that employers seized upon as a way to save money while pretending that they were doing the right thing by their employees.

Today, just like in 2008, if you were still young enough, there’s time to rebuild and recover, but if you are in your 50s, 60s or beyond the consequences can be dire, and its drawing attention to the shortcomings of a retirement system that has jeopardized the financial security of tens of millions of people.

Their most difficult task is estimating appropriate levels of spending, followed by choosing the right health insurance and a sustainable drawdown rate on their savings accounts.

By linking essential expenses with lifetime sources of income, you’re “making sure that these needs are covered regardless of any risks.  Essential expenses are the things you really have to have in life to make life worthwhile for us. And yes, it includes food, shelter, and clothing, and taxes, and all those mundane things.

Major sources of income in retirement are called, lifetime sources, such Social Security and defined benefit plans, and income from assets such as those found in 401(k), IRA and taxable accounts.

You’ll enjoy some big advantages if your lifetime sources of income are sufficient to fund essential lifestyle expenses and using annuities to cover any gaps between essential expenses and income.

  • One, you’ll avoid market risk. You’ll get a steady income regardless of what happens in the market.
  • Two, your income will be guaranteed for life.
  • Three, having this sort of income reduces the odds of outliving your assets, or what’s called longevity risk. And
  • Four, knowing that your essential expenses are covered with guaranteed sources of income could give you the courage to manage your “income from assets” portfolio more effectively—“to establish an appropriate asset allocation and maintain it for the long term.

Another concern is the lack of depth to the guidance, which will outline the options available to retirees – such as taking a cash lump sum or buying an annuity.  Consultants are worried that a “guidance guarantee” for retirees will not be enough as people make their own choice on how to spend their pension savings.

To have financial peace of mind when we retire means moving some of your portfolio towards safety.  Anytime is a good time to diversify, depending on your risk tolerance. Remember that diversification is a technique to try to reduce volatility, not enhance returns.

It may give you a better return, but diversification should be primarily thought of as a risk management tool, especially as you age. As you near retirement, you may want to try to reduce volatility and go for “good returns over time” versus trying to “hit the ball out of the park.”

That is why Fixed Index Annuities are ideal investments for retirement savings, since retirees need an investment that will pay large and reliable income over many years of retirement.

A fixed-indexed annuity, or FIA for short, is an annuity that earns interest that is linked to a stock or other equity index. One of the most commonly used indices is the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500).

With concerns over inflation and making sure that investments will meet our future needs, many people have turned to the fixed market for higher returns. It makes sense when you consider how well the S&P 500 index has performed historically.

The first and possibly most attractive provision of a fixed-indexed annuity is the no-loss provision. This means that once a premium payment has been made or interest has been credited to the account, the account value will never decrease below that amount. This provides safety against the volatility of the S&P 500.

FIAs offer consumers what could be described as the best of both worlds: a market-driven investment with potentially attractive returns, plus a guaranteed minimum return. In short: You get less upside but much less downside.

While it’s a lot like investing directly in the stock market, you don’t get the full boost of a rising market. With fixed-indexed annuities, the money put down by you, as a purchaser, isn’t invested directly in the stock market. Instead, you are offered a percentage of how much the index gains over a period of time, and a guaranteed minimum return if the stock market declines.

Your fixed-indexed annuity, like other fixed annuities, also promises to pay a minimum interest rate. The rate that will be applied will not be less than this minimum guaranteed rate even if the index-linked interest rate is lower. The value of your annuity also will not drop below a guaranteed minimum.

A fixed-indexed annuity typically offers other benefits that are not generally included in traditional policies: a 100 percent money-back guarantee, no front-end sales charges, and no annual management fees or administrative fees. At the same time, most annuities provide a death benefit, so that if the owner of the annuity dies, then the annuitant’s beneficiaries do get the entire balance as a lump sum without any surrender fees or charges.

Another important aspect of an annuity is how the accumulated value (based upon the index increases) eventually gets converted into lifetime income. The general guideline, widely followed by well qualified financial planners is that to provide for up to 30 years of retirement, only 4% of a blended stock/bond portfolio should be spent each year.

Most annuities permit a withdrawal rate considerably higher than this amount, and guarantee that the payments will never end, even if you live for 50 years in retirement or even if the stock market crashes and never recovers.

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Friday, October 17th, 2014 Wealth Management Comments Off

Pension Stripping Alternative

Traditional pensions have been disappearing for years in the private sector, being replaced with 401(k)s, 403(b)s or IRAs.  The questions the many newly retired are asking, why are they changing things that worked so well, and providing so much comfort and security for retirees?

Yes companies are “de-risking” expensive pension obligations off their books.  It is called “pension stripping”. Companies are trying to reduce their exposure to risk, from things like market volatility and changes in the pension guarantee laws.  They are not really de-risking, rather they are transferring the risks to the individual.

The default saving program today is the 401(k) plans in which most of the savings is in the market. The 401(k) was never intended to be the primary retirement tool. It was created at a time when it was meant to be a supplement. In the private sector and even to some degree in the public sector, defined benefit plans have become much less common for most people.

The 401(k) has become by default, not by intention, the primary retirement tool. It should not be. It’s not structured to be the primary retirement tool.

This latest trend leaves retirees without valuable federal protections, for instance, benefits are no longer guaranteed by the Pension Benefit Guarantee Corporation, a key safety net.   It also increases the chance of retirees outliving their money, particularly if the retiree takes a lump sum and doesn’t invest wisely.

There’s sort of a money illusion when you have a big lump sum of money sitting in your 401(k) account. “You think you’re rich.”   We see situations where people at retirement look at this monster lump sum compared to, say, their annual income and they figure: There’s no way I can ever spend all this money.

Retiree’s strategies for drawing down lump-sum accounts in retirement — are more important than ever in the 401(k) era – For retirees, choices about how to spend a life’s worth of savings are fraught with tricky calculations about financial risk, taxes and death.

It is never better for someone to take a lump sum and give up monthly benefits.  You would have to invest so successfully that you must beat the stock market’s historical performance to make a lump sum work. That’s hard to do even for the most seasoned investor or financial planner.

In a well-balanced retirement portfolios lifetime annuities and lifetime guaranteed income products can play a big role in providing retirement security.

Finally, we need to address what some refer to as the “tax torpedo.”  It occurs particularly after age 70½, when 401(k)s and IRAs are subject to minimum distribution rules.  In essence, the tax torpedo means that those taxable distributions can have the additional effect of creating more taxable income from Social Sedcurity.  It’s commonly believed that retirees are likely to be in a lower tax bracket when they stop working.  That may not always be the case.

The drawdown phase of a 401(k) is a piece of the U.S. retirement puzzle that’s attracted little notice until recently. The main requirement — annual distributions from tax- advantaged accounts — is designed to deplete the money, not to make it last. The required minimum distribution rules for retirement accounts, which make retirees take taxable payouts starting after age 70 1/2, are designed to force spending and can cause problems for people who live longer than the average.

Most retirees are primarily concerned with income security when assessing the best retirement income options for themselves.  For example retirees want to be guaranteed that their money will last throughout their lifetime; are keen to protect their income from inflation; and married respondents aim to provide an income for their spouse after their death.

What retirees say they want from their retirement income looks and feels a lot like an annuity and if you want income security in retirement then they’re hard to beat.

With concerns over inflation and making sure that investments will meet our future needs, many people have turned to the fixed indexed annuity market for higher returns. It makes sense when you consider how well the S&P 500 index has performed historically.  The first and possibly most attractive provision of a fixed-indexed annuity is the no-loss provision. This means that once a premium payment has been made or interest has been credited to the account, the account value will never decrease below that amount. This provides safety against the volatility of the S&P 500.

Like the tortoise that raced against the hare in the classic children’s fable, fixed index annuities never rest, always move ahead carefully and deliberately, and never lose principal or profits in years that the stock markets drop.  FIAs offer consumers what could be described as the best of both worlds: a market-driven investment with potentially attractive returns, plus a guaranteed minimum return. In short: You get less upside but much less downside.

In order to offer the kind of guarantees and protections that fixed index annuities provide, the sponsor has to have a set of rules and procedures by which the company can be protected from both excess gains as well as devastating losses. The annuity sponsors can do this through a number of techniques, including caps (a limit on the maximum amount that the account can increase in any year), spread (the difference between the actual market performance and the amount actually granted) and participation rate (the percentage of the index increase that accrues to your account).

While it’s a lot like investing directly in the stock market, you don’t get the full boost of a rising market.  With fixed-indexed annuities, the money put down by you, as a purchaser, isn’t invested directly in the stock market. Instead, you are offered a percentage of how much the index gains over a period of time, and a guaranteed minimum return if the stock market declines.

A participation rate or a cap can be raised up or down, reflecting current market and economic conditions. During strong economic times, these rates and caps will be higher; during weak or negative economic times, they will be lower. This flexibility is advantageous for the consumer: the annuity contract adapts to market conditions while also being protected with minimum guarantees and suffering no losses because the index change is negative.

However, like any investment, the company can only cover the expenses and profit requirements if it retains the investment for a sufficient period, often several years. If an annuity contract is cancelled too early, these expenses will more than likely be greater than their investment returns, and the insurance company will suffer a loss.

The surrender charge method imposes the burden of repaying unrecovered expenses only to those who caused the loss by not fulfilling the contractual obligation.  Annuities have charges (called surrender charges) that are made ONLY when you take money out of the annuity. Most fixed annuities allow you to take a certain amount of money without paying any charges usually 10% of the principal.

That is why Fixed Index Annuities are ideal investments for retirement savings, since retirees need an investment that will pay large and reliable income over many years of retirement. At the same time, most annuities provide a death benefit, so that if the owner of the annuity dies, then the annuitant’s beneficiaries do get the entire balance as a lump sum without any surrender fees or charges.

A fixed-indexed annuity typically offers many benefits besides a lifetime income;  a 100 percent money-back guarantee, no front-end sales charges, and no annual management fees or administrative fees.  We recommend that a retiree purchases an annuity, one of the few options available that would provide the kind of security that is being sought.

Another important aspect of an annuity is how the accumulated value (based upon the index increases) eventually gets converted into lifetime income. The general guideline, widely followed by well qualified financial planners is that to provide for up to 30 years of retirement, only 4% of a blended stock/bond portfolio should be spent each year. Most annuities permit a withdrawal rate considerably higher than this amount, and guarantee that the payments will never end, even if you live for 50 years in retirement or even if the stock market crashes and never recovers.

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Wednesday, October 15th, 2014 Wealth Management Comments Off

A Retirement Foundation That Works

U.S. stocks declined on Monday, with investors on shaky ground after a third week of losses pushed the Dow industrials into negative terrain for the year as investors fretted signs of a slowing global economy.  Volatility has suddenly returned to U.S. stocks, and for the first time all year it doesn’t appear that the weakness in equities will go away quietly in the span of a few days.

What is interesting about what is going on is that you have several themes all feeding into the same action, and that action is to mitigate risk.  During a stock-market decline, there are those who panic and sell. And then there are those who don’t have any choice.  You too could suffer permanent losses during a bear market —.

Decision-making for retirement planning is not easy, as you have to thoroughly think through the “what-if’s” and the “what-when’s” to help answer the “what do I do’s.”  A time frame of 25 to 35 years is hard to project accurately. Factors such as increased inflation, lower expected returns or unforeseen emergency expenses could critically affect the long-term success of a financial plan.

Many people approaching retirement are concerned about how long they will live and what their quality of life will be.  An equally serious concern that people have is outliving their money, and inflation eating away at the power of their life savings. It is scary to think that one could spend through one’s entire nest egg, only to become dependent upon others. Assuming an average inflation rate of 2.1 percent, an expected rate of return of 4 percent and a life expectancy of 95 certainly increases the possibility of running out of money and becomes a huge risk in retirement.

Are interest rates going higher?” Obviously, with the fed funds rate basically at zero, we know they are going higher but we need to figure out what is that final catalyst going to be. Whatever it is it will change the financial picture for retirees — and not just their income.

Every day for the next 19 years, about 10,000 more will cross (the retirement) threshold. By 2030, when all Baby Boomers will have turned 65, fully 18 percent of the nation’s population will be at least that age.  Critics don’t expect the retirement boom to let up and they expect the consequences to be detrimental.  The retirement of massive numbers of baby boomers over the next decade or so will put a drag on the U.S. economy.

Ask any Wall Street advisors who specialize in investments about what should be done.  At their core, the suggestions amounted to risky bets on interest rates, the value of money, precious metals, real estate, junk bonds, hedge funds, private equity, mutual funds, ETFs, stock market bubbles or bursts, foreign exchange rates, and so forth. It boils down to this, “if we leave our money invested in the market, whether stocks or long-term bonds, we are subject to crippling losses of 10% to 60% in any given year.”

It’s probably natural to get somewhat more apprehensive about market volatility during your retirement years.  As an investor, you’re well aware that, over the short term, the financial markets always move up and down. During your working years, you may feel that you have time to overcome this volatility. And you’d be basing these feelings on actual evidence: the longer the investment period, the greater the tendency of the markets to “smooth out” their performance.

But what happens when you retire? Won’t you be more susceptible to market movements?  At various times during your retirement, you will, in all likelihood, witness some sharp drops in the market.  You may be tempted to “take advantage” of volatility by looking for opportunities to “buy low and sell high.” In theory, this is a fine idea — but, unfortunately, no one can really predict market highs or lows.

The market doesn’t go up forever and the market doesn’t go down forever. Are we in for a correction? Absolutely, we are at an all-time high.  Obviously, putting more of your money into the stock market carries risks of its own. After a five-year bull market, many believe stock prices are too high, and corrections and bear markets are inevitable in the long run. But if stock prices are at or close to their highs — which is where we are today — consider shifting the money into conservative investments, so you avoid the risk of selling shares at fire-sale prices.

Sometimes the best provision or the highest yield isn’t the best thing out there.  If it looks too good to be true, chances are it is.  Spreading your money among a range of vehicles — stocks, bonds, certificates of deposit, government securities, annuities and so on —can help you avoid taking the full brunt of a downturn that may primarily hit just one type of investment (Keep in mind, though, that while diversification can help reduce the effects of volatility, it can’t assure a profit or protect against loss).

Let’s develop these principles of responsible investing and let’s focus the money to places that it is going to have the greatest impact.  Many retired investors believe that the best way to ensure that they’ll be able to outlive their savings is to eliminate as much risk from their portfolios as possible, protecting their investment principal at all costs.

We all would like to create examples of individual retirement stock portfolios that are diversified, begin with close to a 4% payout, grow that payout faster than inflation via dividend growth, and have that growing flow last till you die without ever touching the original capital because you do not want to outlive your money. This is more a dream rather than realty, especially in today’s market environment, in which high levels of risk-free current income are nearly impossible to find.

Today’s retiree faces unprecedented challenges: heightened market volatility, historically low interest rates, escalating health care costs and the reality that we are living longer than ever before.  Also consider that defined benefit plans (pensions) are declining, inflation and taxes may be increasing, and entitlement programs like Social Security and Medicare are grossly underfunded. Securing your retirement income has never been more crucial.

Retirement Income annuities can guarantee a steady, reliable income stream for life.  Annuities main strength is that it creates a “Personal Pension” income stream by insuring the risk of dying too late. With an income annuity you enjoy peace of mind knowing your income is guaranteed for an entire lifetime. The peace of mind may grow increasingly valuable over time as each of us grows older, we may become less confident managing a “Do It Yourself” approach to creating a reliable retirement income.

The purpose of an annuity is always income, whether you need money now, or in the future. Our ground breaking Fixed Indexed Annuity features locks in investment gains when the markets perform well, and guaranteed growth allows your income to grow even when markets underperform.

Each year, the growth and interest on annuities is credited, locked-in, and protected by the legal (statutory) reserve system of America’s insurance companies. Therefore, principal and interest can grow, compounding.  Working together, these two features offer growth-on-growth potential, regardless of what happens in the markets.  Along with Social Security an annuity can be the foundation to a safe, stable and secure retirement plan.

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Monday, October 13th, 2014 Wealth Management Comments Off

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